Wednesday, March 14, 2007


Gold Faces "Short-Term Dilemma"

Bloomberg reports on currencies. "The yen weakened against the euro and the dollar, as investors regained some appetite for riskier assets and U.S. stock markets rallied. The yen fell against all of the most active currencies as traders increased bets investors will resume borrowing in the Japanese currency to finance investments in riskier assets, a practice known as the carry trade. The dollar got a boost as U.S. stocks rebounded from their earlier declines."

"'When the equity markets rallied, traders saw some room for taking risks, and carry trades started to come back,' said Brian Taylor, chief currency trader at Manufacturers & Traders Trust. 'The yen lost ground.'"

"The yen fell 0.88 percent to 154.79 per euro at 3:18 p.m. in New York. It dropped 0.69 percent against the U.S. dollar to 116.97 and 1.07 percent against the Australian dollar to 91.86."

"The Bank of Japan's benchmark interest rate of 0.5 percent is the lowest in the industrialized world. The spread between the 10-year German note and a comparable Japanese bond widened 3 basis points to 2.91 percent. The difference between the German note and the benchmark U.S. Treasury widened 2 basis points to 0.62 percent."

"'The yield outlook still favors the euro and the dollar over the yen,' said Michael Malpede, a senior currency analyst at Man Global Research."

"'The dollar is hooked up with the equity market,' said Grant Wilson, a currency trader at Mellon Bank. 'When the equity market weakened, the yen gained strength and people tried to get out of the dollar.'"

From MarketWatch. "Gold futures fell Wednesday to close at the lowest level in more than a week, tracking losses on Asian and European stock markets as fears over increasing mortgage defaults escalated and investors sold commodities in pursuit of liquidity."

"The benchmark contract has now fallen over the last four sessions, tallying a loss of $13 an ounce, or 2%, for the period."

"Gold for April delivery fell $6.90 to close at $642.50 an ounce on the New York Mercantile Exchange, recovering modestly following a drop to a low of $637.70. The contract hasn't traded or closed at levels this low since March 5. May silver fell 1%, slipping 13 cents to close at $12.83 an ounce, while June palladium lost 50 cents to end at $343.50 an ounce and April platinum dropped $22.60 to close at $1,201 an ounce, a 1.9% retreat."

"'Once again, gold remains tied to severe sell-offs in the general markets,' said Peter Spina, chief investment strategist at 'The sell-off in the markets is actually bullish for gold as a four-letter word absent from investors' vocabulary returns,' he wrote."

"All the same, gold faces a 'short-term dilemma,' Spina said. 'As we see relentless selling in the general markets, a move to raise cash occurs and gold is not immune.' In the end, however, this 'presents an opportunity for those who seek shelter who can purchase this asset at discounted prices.'"

"'Gold has come under renewed external pressures, as a string of negative news keeps global investors and their assets in search of a quick escape route,' said Jon Nadler, an analyst at Kitco Bullion Dealers. 'Three weeks ago, it was the yen carry-trade going into full reverse that made the headlines and ostensibly dragged gold down with it,' Nadler said."

"'Now comes the crumbling U.S. subprime lending market and the huge shadow it is throwing on the shares of financials and home builders,' he said."

From Reuters. "'We turn from oil and currency watching to stock watching. We expect more stop loss triggers and more downside,' said Michael Kempinski, vice-president at Commerzbank. 'Gold really needs some fresh buying from the investor side, but as long as they are losing money on stocks, there will be no new money for investment in gold.'"

"Behind the sell-off is a perception that the liquidity created by cheap money, which has fuelled the commodity and stock market bull run for years now, is about to dry up. Cheap money has come in the form of the yen, which investors have been borrowing for years at low interest rates to invest in higher yielding assets. But Japanese interest rates are rising."

"'The price action in the gold market continues to question the theory that gold is an asset that performs well during periods of risk aversion,' JPMorgan said in a research note. 'The reality is that gold -- like all assets -- is subject to positioning adjustments and with the speculative community long, any position squaring exercise by its very nature will hurt the gold price somewhat.'"

"The latest trigger for the sell-off in equity markets was the mounting crisis in U.S. mortgage lending. Those jitters would normally spark a flight to precious metals, but investors are already holding a lot of gold, which may have to be sold to cover losses on equity markets."

"'The renewed round of equity not based on rumours but on longer-lasting economic developments,' Dresdner Kleinwort said. 'A slowdown of the US economy with an increasing risk of slipping into recession would also reduce the appeal of gold as a hedge against inflation.'"

"U.S. gold speculators cut their net long positions by 28 percent last week to 101,698 contracts and expectations are of further sell-offs. Investors who use exchange-traded gold funds have also reduced their exposure. The New York-listed StreetTRACKS gold fund, the world's largest gold ETF, which accounts for about 80 percent of the metal jointly held by such funds, fell by four tonnes between last Friday and Monday."

"Prices of U.S. imports rose less than forecast in February, held down by lower costs for metals and machinery that may help keep a lid on inflation. The cheapest imported business equipment in almost a year is among factors that may make it easier for the Federal Reserve to keep interest rates unchanged. Policy makers will see reports on wholesale and consumer prices in coming days as they prepare for next week's interest-rate meeting."

"'This is definitely a Fed-positive report,' said Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. 'It supports the case for the Fed to sit tight and continue to watch inflation pressures recede.'"

"The shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, followed a record $229.4 billion third-quarter gap."

"The deficit may narrow this year for the first time since 2001 as U.S. exports rise and oil prices stabilize, economists said. Even with the improvement, the U.S. needs to attract about $2.1 billion a day to fund the gap, an imbalance that threatens to undermine the dollar and boost interest rates in the event foreign investors shy away from American assets."

'the U.S. needs to attract about $2.1 billion a day to fund the gap, an imbalance that threatens to undermine the dollar and boost interest rates in the event foreign investors shy away from American assets.'

We really can't get away from this situation. Eventually, the US must balance the books or suffer a serious devaluation. But the deflationist in me sees many things over-priced and in over-supply.

And gold is looking technically weaker again today. Dilemma indeed.
Ah, therein lies the rub!

I don't see a way out that doesn't involve more pain than anyone dares contemplate. Until they do, gold will bounce around alot while slowly inching higher.
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?